In connection with the preparation of the DCAA report concerning their access to contractors' records, the DCAA personnel visited 28 field offices and determined to what types of documents the government auditors had access. Of 23 major defense contractor locations, where there was internal audit department functions, 6 of the contractors' locations were not providing DCAA with "complete access", which included the reports from their internal audit departments (Document 18, pages 23 and 29).

Subsequent to the compilation of this report, 4 of the contractors agreed to provide access to their internal audit reports, so as of the time of his deposition Curry stated that 21 out of 23 of the defense contractor locations investigated were providing DCAA with access to their internal audit reports.

Of the corporations providing DCAA access to internal audit reports, some of them may not have provided all of their internal audit reports to the DCAA. However, Curry testified that he knew of no instance where an internal audit report requested by the DCAA was denied by any of the 21 contractor locations providing access. In addition, a survey on July 20, 1984 of over 200 contractor locations indicated that the DCAA was obtaining access to internal audit reports at all except 16 of them (Document 18, page 44).

The IG issued a Memorandum on September 19, 1983 providing that the DOD audit and investigative agencies which are under his control may request the issuance of an IG subpoena in support of audits and investigations conducted by them, where that audit or investigation is in furtherance of a statutory function of the IG and within the scope of the IG's statutory power. This memorandum was issued by the IG to all relevant auditing segments of the DOD, the "effective organization" of the IG, including the Army Auditing Agency, Navy Audit Agency, Air Force Audit Agency, DCAA, and the Criminal Investigative Divisions of the Army, Navy and Air Force. The memorandum was admitted as respondent's Exhibit S-2 and it outlined the policy of the office of the IG with regard to audits, investigations and the issuance of subpoenas. In explaining the policy the IG testified:

"I'm not in the business of issuing subpoenas. What I am in the business is of investigating and auditing and inspecting. And if I feel that an inspection that they have under way is of vital interest to the Department of Defense, and comes within my function, and is one in which I should give it priority, I will pick up that investigation and incorporate it as part of my function and responsibility. I will designate it as such and carry it out, using one of those service organizations, if they're already involved in that subject . . . ." (Sherick testimony, Tr. page 131)

In February, 1984, DCAA advised Westinghouse that it wished to conduct what it called an "inter-operational audit" of the Westinghouse internal audit functions. On June 11, the branch manager of DCAA, Pittsburgh office, set forth the DCAA rationale for requesting both the operational audit and the internal audit reports. DCAA indicated that its purpose was to obtain support for its contract auditing function. Westinghouse declined to comply with the DCAA request because these it said were internal audit reports or management documents which do not reflect incurrence and allocation costs.

To effectuate this broad mandate over "all matters" relating to economy and efficiency of an agency, Congress empowered each IG:

". . . (4) to require by subpena (sic) the production of all information, documents, reports, answers, records, accounts, papers, and other data and documentary evidence necessary in the performance of the functions assigned by this Act . . . ."

Therefore, in examining only the language of the 1978 Act (which was later made applicable to the IG of the DOD), for the subpoena in the instant case to be enforceable, the internal audit reports sought must be "necessary" for the IG's oversight responsibilities with regard to "all matters" relating to economy and efficiency of the DOD.

Both the 1978 Inspector General Act and the Amendment of 1982 are not only unambiguous, but they speak clearly and distinctly for the purpose of preventing and detecting ". . . fraud and abuse in, programs and operations administered or financed by . . ." the specific departments. However, because the respondent in raising the contentions as it does, seems to have confused a comment in the Congressional Report for the 1978 Act and has disregarded the specifics in both Acts, but particularly in the Amendment of 1982, and when Congress has spoken as vehemently as it did here, it is appropriate, while not necessary, that these be pointed out to add further forcefulness to the statutory text.

The case of Train v. Colorado Pub. Int. Research Group, 426 U.S. 1, 48 L. Ed. 2d 434, 96 S. Ct. 1938 (1976) re-enforced what was stated in United States v. American Trucking Assns., 310 U.S. 534, 543-44, 84 L. Ed. 1345, 60 S. Ct. 1059 (1940). "To the extent that the Court of Appeals excluded reference to FWPCA's legislative history in discerning the meaning of the statute, the court was in error, for 'when aid to construction of the meaning of words, as used in the statute, is available, there certainly can be no 'rule of law' which forbids its use, however clear the words may appear on 'superficial examination.'"

"Our analysis does not stop with the language of the statute; we must look to 'the objects and policy of the law.' Brown v. Duchesne, 19 How. at 194. In order to 'give [the Act] such a construction as will carry into execution the will of the Legislature . . . according to its true intent and meaning,' ibid, we turn to the legislative history. Schlanger v. Seamans, 401 U.S. 487, 490, n. 4 [28 L. Ed. 2d 251, 91 S. Ct. 995, n.4] (1971). See also United States v. Culbert, 435 U.S. 371, 374, n.4 [55 L. Ed. 2d 349, 98 S. Ct. 1112, n.4] (1978); Train v. Colorado Public Interest Research Group, 426 U.S. 1, 9-10, 96 S. Ct. 1938, 48 L. Ed. 2d 434 (1976).

The respondent insists that the clause in the Congressional Report of the Inspector General Act of 1978, at page 2709, that "The use of the subpoena power to obtain information for another agency component which does not have such power would clearly be improper", be translated in its strict literal sense. This would be unreasonable, particularly in light of what remedies Congress was attempting to effect by means of the creation of IGs in all departments, except in the DOD, and in light of the fact that it took another amending statute, after three years of concerned study, to create the IG for the DOD with special, additional statutory provisions.

In order to determine if Congress intended to limit this expansive language, I have thoroughly examined the legislative history and surrounding statutory circumstances of both the 1978 Inspector General Act and the 1982 Amendment. See North Haven Board of Education v. Bell, 465 U.S. 512, 522, 102 S. Ct. 1912, 72 L. Ed. 2d 299 (1982).

Congress outlined the tremendous scope of the problem indicating that fraud, abuse and waste in the operations of Federal departments and agencies and in federally funded programs were reaching "epidemic proportions". The problem was not new, but the evidence indicated that waste and mismanagement was now of an "extraordinary magnitude". The "cardinal principle" that had been violated in the previous auditing structure was that the auditors and investigators were under the supervision of the officials of the programs which they were attempting to audit and investigate. (1978 U.S. Code Cong. & Ad. News, 2679-2681), Congressional Report).

Congress finally made a big step forward. It enacted the Inspector General Act of 1978. By this statute it created numerous inspector generals, one for each department or agency.
*fn4"
They had the power of subpoena to inspect all documents necessary for the ascertainment of fraud, abuse, waste and mismanagement in government contracts.

While the 1978 Act did not give the IG powers to administer or to prosecute where the facts of the case might be such as would require these matters to be done, it did give him the power to report to the proper department and agency for such action and in order to permit the IG to investigate and ascertain the factual matters required for his duties, it gave him the power "to subpena (sic) such materials as he deems necessary to carry out his duties and responsibilities . . ." (§ 6(a)(4), page 2708).

Oddly enough, while the legislators were considering the adoption of this statute and its particular wording, it spoke very insistently of the need of the IG of the DOD, but in the adoption of the Statute, the DOD was disregarded.

"The purpose of this legislation is to create Offices of Inspector Auditor
*fn6"
General in seven executive departments and six executive agencies to consolidate existing auditing and investigative resources to more effectively combat fraud, abuse, waste and mismanagement in the programs and operations of those departments and agencies." (footnote added)

On page 2702, under Section 4, "Duties and Responsibilities", the Report specifies the functions of the Inspector General, Subsection (a)(1), to provide supervision and coordinate policy direction and conduct, supervise audits and investigations relating to programs and operations of his establishment; under Subsection (a)(2) to make recommendations to his agency head and the Congress; Subsection (2)(3) to recommend policies for and to supervise or coordinate activities carried out by such agency or financed by such agency for the purpose of promoting economy and efficiency and detecting fraud and abuse in its programs and operations.

The Congressional Report, however, bespoke itself when it stated at page 2678:

"The committee has decided that the legislation should also cover the Department of Defense. The legislation contains several provisions necessary to meet the unique needs of the Defense Department". (Emphasis added).

And yet, when Congress enacted the final version, the IG for the DOD was omitted. The explanation is eventually supplied by the Senators at the two hearings held on June 18, 1981 and March 25, 1982.

In the meantime, the Secretary of Defense supplied his own employees as various inspector generals in the defense agencies. But the Secretary also appointed one whom he titled the Assistant to the Secretary of Defense for Review and Oversight (Tr. page 86), and whom he used as were the other statutorily appointed inspector generals in accordance with the provisions of the Inspector General Act of 1978. This did not meet with the approval of the Senators and they expressed themselves openly in the hearings held for the purpose of providing an Inspector General for the Department of Defense and two other departments, the Department of Justice and the Department of Treasury.

At the hearing before the Committee on Governmental Affairs in the United States Senate, Part 2, on March 25, 1982
*fn7"
for Inspector General Legislation, Chairman Senator William V. Roth, Jr., amongst others made clarifying remarks regarding the purpose and intention of the legislation which was to be considered by the Congress.

Excerpts follow:

Page 3:

"I am particularly concerned about the lack of centralized audit and investigative responsibilities in the Defense Department. Audit resources are so dispersed in D.O.D. that it is almost like straining tea through an ocean fishing net: too many pieces of tea leaf are getting through. Just to use one example, there are over 18,000 employees in D.O.D. performing audit and investigative functions and some $500 million is spent annually to support their activities. Yet these personnel are spread over at least 18 different agencies with D.O.D. and until recently there were some eleven coordinating committees to ensure cooperation among the various audit organizations in D.O.D. Clearly, there is no 'rapid deployment force' when it comes to controlling waste and fraud in D.O.D. but rather a mixed jumble of, in many cases, uncoordinated agencies and programs.

. . . .

We must have a strong, statutory Inspector General in place in D.O.D. as soon as possible.

. . . .

We can't accept fraud in D.O.D. programs, like that which may have resulted in over 80 percent cost overruns for the overhaul of Navy ships, recently, without establishing better mechanisms for controlling fraud. We cannot tolerate bad management practices and effective service coordination without creating an inspector general to systematically review inter-service management and push for improvements".

And Senator Bentsen said at page 8:

"Everyone, in other words, knew that there was waste in that huge appropriation, but we didn't know where to find it. With an independent inspector general at DOD, we'll all be in a better position to monitor how the hundreds of billions of dollars we appropriate every year for defense are being spent." (Emphasis supplied).

When the dissatisfaction of certain Senators became more manifest and a new amending bill to create an IG for the DOD became more realistic, it appears that the Secretary of Defense also presented a bill which, according to the Senators, would merely have continued on an IG as an employee of the Secretary of Defense. This the Senators did not accept.

At the second hearing the Senators practically accused the Defense Secretary of being antagonistic to the bill which would have created an independent IG, primarily because the Secretary wanted to have control over the IG.

The Senators on the Committee argued that if the Secretary had control over the IG and could tell him what to do or what he should not do, then he would not be independent. They stated that they would not stand for that. They wanted an independent IG.

Deputy Secretary of Defense, Frank Carlucci, argued that the Secretary of Defense should have the power of veto over any matter which the IG would want to process, because of certain problems which would affect the welfare and security of the United States.

Senator Prior voiced his fear and stated that he didn't think that speaks of independence. Senator Eagleton and others voiced their apprehensions to Mr. Carlucci's testimony, and that if the amendment as requested was approved, it would be merely a "cosmetic" approach.

When the amending statute of 1982 was finally enacted, Congress yielded in part to the Secretary of Defense by permitting him a veto power only of such matters as dealt with security in defense but not otherwise. But even in the veto power the Secretary was required to report the facts of the case to Congress within thirty days.

THE DEFENSE CONTRACT AUDIT AGENCY (DCAA) RULE

Did the Senators in the hearing before the Committee on Governmental Affairs in the United States Senate Second Session, Part 2, on March 25, 1982, contemplate that the DCAA would under the new IG Amendment be an unrelated agency in the Defense Department family of agencies without any obligations to the IG to be? Did the Senators of the Committee at the Part 2 hearing intend that the IG should have no relationship with, or use of the facilities and resources and personnel of the DCAA as with all other component agency parts of the DOD?

Inasmuch as the respondent imputes a lack of cohesiveness of the DCAA within the entire family of defense agencies, it is noteworthy that the Senators discussed DCAA's significance in the 1978 Report.

Thereafter the report discusses internal strife and a lack of communication. The Committee said (at page 2696):

"But the deficiencies which exist intensify the committee's belief that the Secretary of Defense, and Congress, need a strong and independent auditing and investigative capability at the OSD level".

Since the GAO
*fn8"
reported important improvements by the service itself "to upgrade the placement of auditing in the service and to remove all restrictions on the functioning of the service audit agencies", the Committee recommended that no "organizational changes be made in the service audit and inspection functions". Then, at the 1982 Act Amendment hearings, this problem was blared out loud.

The respondent objects to the action of the IG's subpoena of the respondent's internal audit reports on the theory that it is a device which furthers the ulterior purpose of the DCAA. Accordingly, we should better understand the complex parts of the DOD, and particularly the DCAA. In a conversation between Sherick and Senator Eagleton, the Senator said (Report, page 27): ". . . there are some 18,000 individuals in the Department of Defense that in one form or another have something to do with auditing, investigating, accounting and the like"; that "there are about 4,000 support people"; that this "included the Defense Contract Audit Agency"; that "there is an inspector general for each of the services"; and that each of the following have inspector generals: the Army, Navy, Air Force, Marine Corps, Defense Communications Agency, Defense Intelligence Agency, Defense Logistics Agency, Defense Mapping Agency and Defense Nuclear Agency. A summary sheet was prepared for the Committee which is reflected in the Report, page 29. In total the figure for auditors was 13,389 professionals; 4,426 support people; and 2078 augmentees. All were under the command and control of the Secretary. The Senators discussed the DCAA thoroughly at the hearings as is reflected from pages 30 through 39.

The Committee was told by Sherick who was then the Assistant to the Secretary of Defense for Review and Oversight that these were experienced auditors and "their expertise is generally across the board in the evaluation of proposals and the post-award audit of the contract that eventually comes out of that proposal". (Report, page 32). Senator Eagleton asked Sherick whether his statement would be a fair conclusion and he was told that it would. The statement reads as follows:

". . . In short, the large part of DCAA's responsibility is pre-award work. They are not necessarily looking at whether fraud or waste has been committed after a contract has been entered into. They are advisers and not necessarily skeptical critics of the contracting officers, and the contracting processes". (Report, page 32).

Sherick supplemented this with "they are critics in the sense that they disallow and question costs on contracts. That is their job. They do not review the contracting process; that is the function of the internal audit agencies".

As relates to privileged communications, the matter was discussed before the Committee (Report, page 35), and the answer to Senator Eagleton by Sherick was "I think there may be privileged contractor data. DCAA is looking at the contractor's proposal, and looking at important information that is competitive in nature and shouldn't be revealed. Beyond that I think all the proposals are open to audit".

Senator Eagleton said he understood and summarized his concerns as follows (Hearing, Part 1, page 38):

Third, that the DCAA lends a very valuable service in the advisory role to negotiating contract officers who need such auditors at their sides with "a tough auditing capacity"; and

Fourth, that ". . . We still need, once you get beyond the advisory role, a tough auditing capacity . . ." and that most auditing "is not auditing at all; it is financial negotiating advice that is given to the negotiating team".

Sherick then made the comment (Hearing, Part 1, page 38), that "They (DCAA) have a reputation for being very professional people".

In the Hearing, Part 1, page 40, in one of the written questions of Senator Roth to Deputy Secretary Carlucci, part of the question asked was ". . . what is being planned to make the DCAA more effective and what role could the proposed Inspector General plan in making this office more effective?" A part of the answer was ". . . The proposed Inspector General is charged with evaluating and monitoring contract audits and should thereby be able to assist in improving DCAA's effectiveness".

In a written question by Senator Roth to Deputy Secretary Carlucci, who was insisting that the DCAA belonged with the advisory staff of negotiators for the DOD, even he agreed that if the DCAA was not included in the transfer of offices, the Senate could not be assured that the contract audit principles would be effectively managed and reviewed by the IG.

At page 34 of the Hearing, Part 1, it was stated that DCAA audit reports were not always acted upon. And when Senator Eagleton, talking about the performance of DCAA with regard to the report of the GAO, asked in effect of Sherick, the contemplated IG, what would you do to eliminate the problem of the DCAA auditors having too close a relationship with the contractors and not being as vigilant as it should be in its auditing and examining of the records, Sherick said, "I have oversight and evaluation over DCAA and I will look into that matter". (Hearing, Part 1, page 35).

Sherick further answered (Hearing, Part 1, page 34), "That is one of the things I will look into to find out why price negotiating memoranda are not being written and why are they not addressing the auditors' problems and recommendations. He owes it to the auditor to say why he did not take that advice". Senator Eagleton then responded, "I hope you will use your influence, Mr. Sherick, to see that it is rectified. It has been a continuing problem . . .".

At the Hearing, Part 1, page 37, Senator Eagleton pointed out that the DCAA and also the negotiating contractors and the government contract auditors had limited their own access to some important information, and that "Contrary to both DOD policy and regulations and public law, contract auditors are not always provided with the information necessary to review contractor pricing proposal or contractor cost. Contractor auditors may have compounded the problem by entering into agreements which have limited their own access to contractor data". All the other Senators echoed this concern that DCAA was not getting all the information to execute its proper functions.

The IG Amendment of 1982 did not come by quickly or by unanimous thinking. Various versions in both the Senate and House were argued, mulled over and amended. But the Senate also had some versions backed by the DOD which resisted an independent IG. At the bottom of these versions the main concern was whether the IG was to remain as a DOD employee under the control of the Secretary, or whether a presidentially appointed IG was to be created as an independent official working in that Department with the Secretary.

(7) develop policy, evaluate program performance, and monitor actions taken by all components of the Department in response to contract audits, internal audits, internal review reports and audits conducted by the Comptroller General of the United States;

(8) request assistance as needed from other audit, inspection and investigative units of the Department of Defense (including military departments); . . ."

(Emphasis supplied).

A proper understanding must be had of the difference between § 8 of the Inspector General Act of 1978 and that in the Amendment of 1982.

The Act of 1978 did not create an inspector general for the DOD. All it did was to authorize the Secretary of Defense to provide his own inspector general. This had come about because of the opposition of the Defense Department to the creation of an IG equal to those of other departments. In order to take care of the situation Congress in the 1978 Act then gave special instructions to the Secretary of Defense. Primarily, it required the Secretary to submit to Congress semi-annual reports summarizing the activities of the auditing and investigative units of the department, which Congress, numerically and alphabetically detailed and § 8(5)(b)(1) authorized the establishment of a task force "to study the operation of the audit, investigative, and inspection components in the Department of Defense which engage in the prevention and detection of fraud, waste, and abuse . . ." It provided further of the rights and powers of the task force and regulated its functioning.

The Merck Case. The respondent and Amicae rely heavily on Bowsher v. Merck & Co., Inc., 460 U.S. 824, 75 L. Ed. 2d 580, 103 S. Ct. 1587 (1983), to the effect that the Supreme Court said that the Comptroller General could not have access to indirect costs of a contract. The Merck case had three fixed-price negotiated contracts with the Defense Supply Agency and the Veterans Administration for the sale of pharmaceutical products. The prices were based on those in Merck's catalog. The contracts were negotiated rather than awarded after formal advertising. A negotiated contract is the method authorized by the statute for use in situations in which formal advertising and bidding is deemed impractical or unnecessary (See footnote, page 827). Each contract contained a standard access-to-records clause granting the Comptroller General the right to examine directly pertinent records involving transactions relating to the contract. In reliance upon these, the Comptroller General issued a formal demand to Merck for access to a series of documents and records directly pertinent to the contracts.

The district court, after the Comptroller General sought enforcement, rejected Merck's argument that the costs records were not directly pertinent to the fixed-price contracts. Merck also expressed concern in participating with the Comptroller General's demand without adequate assurance of the confidentiality of the cost data which it was requested to supply.

The Supreme Court held that the statutory language "directly pertinent"
*fn9"
as authority to the Comptroller General had a restrictive meaning in which Congress intended to prevent "snooping" of private businesses, as was reflected in the Congressional Report.

The present situation is different. The statutes creating the Inspector Generals and their specific powers, especially that of Inspector General of the Department of Defense, contain no limited or restrictive power such as was imposed upon the Comptroller General. There is only a specific veto power imposed on the Inspector General for Defense as it relates to matters of national security when the Secretary may veto the action of the Inspector General and report fully to Congress within 30 days of the circumstances involved and his reasons for the veto. Otherwise, the statute creating the Inspector General of Defense is lavishly concerned with the extraordinary independent, capability and potency of the Inspector General. The Secretary did not veto the instant action of the IG.

{F. Supp. 1183contd}

[EDITOR'S NOTE: The page numbers of this document may appear to be out of sequence; however, this pagination accurately reflects the pagination of the original published documents.]

The Subpoena is Sidetracked by the Respondent's Appeal. The respondent contends that because it appealed a decision of the DCAA regarding its demands for documents to the Armed Service Board of Contract Appeals, ASBCA No. 30593, as of January 9, 1985, the IG of the DOD could not sidetrack that process by his subpoena. The 1982 Inspector General Amendment says nothing at all about proceedings which would terminate or interfere with the IG's independent powers to proceed to initiate, conduct and supervise such audits and investigations as he considers appropriate.

Whether or not the DCAA, itself, has any rights to access of such records as demanded, which the respondent refused, is of no concern to this enforcement proceeding. While the Armed Services Board may have the right and may eventually make a determination that the DCAA as an agency must pay the costs after requesting certain documents from the respondent based upon the clauses in the contracts and by regulations, and may thereafter grant or deny the respondent's appeal, that would not affect the IG's right to investigate and use the DCAA as his own personnel in initiating, conducting and supervising such audits and investigations, as he considers appropriate. There is no substantial connective basis by which the respondent may indicate that its preliminary appeal to the Armed Services Board prevents or estops the statutory right of the IG to proceed in this case, since that appeal does not affect the power, authority, or purpose underlying the issuance of the IG subpoena. Therefore, the fact that the respondent has taken an appeal is not an issue here and does not deprive the IG of the right to look at the respondent's internal audit reports, as part of his own investigation.

The 1982 Amendment leaves no doubt that the intention of Congress in authorizing investigations supported by subpoenas and enforcement of subpoenas was intended to enable the IG to discover and procure evidence and not to prove pending charges or complaints. Similarly, the administrative apparatus established by Congress for use of other agencies by the IG was intended to delegate effective power to investigate certain matters within the scope of his authority. Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 90 L. Ed. 614, 66 S. Ct. 494 (1946).

The Subpoena is Too Burdensome. The respondent states that compliance with the subpoena would require approximately 3700 hours of effort and $55,000 in direct reproduction costs (although the government has not required that the documents be copied, only made available for inspection), in order to produce the 920 internal audit reports that relate to DOD contracts. This process, according to the respondent, would be extremely disruptive of their internal audit process in terms of diversion of personnel, and the temporary loss of access to records.

In United States v. Firestone Tire & Rubber Co., 455 F. Supp. 1072 (D.C.D.C., 1978), the National Highway Traffic Safety Administration sought different types of records over a four-year period. Firestone complained that compliance would entail 100,000 hours of work and $2,000,000, which would be unduly burdensome and unreasonable. The court, nevertheless, upheld the subpoena. Quoting F.T.C. v. Texaco, Inc., 180 U.S. App. D.C. 390, 555 F.2d 862, 882, C.A.D.C., 1977, cert. denied, 431 U.S. 974, 97 S. Ct. 2939, 53 L. Ed. 2d 1071 (1977), the court summarized the relevant considerations: "We emphasize the question is whether the demand is unduly broad. Some burden on subpoenaed parties is to be expected and is necessary in furtherance of the agency's legitimate inquiry and the public interest. The burden of showing that the request is unreasonable is on the subpoenaed party. Further, that burden is not easily met where, as here, the agency inquiry is pursuant to a lawful purpose and the requested documents are relevant to that purpose. Broadness alone is not sufficient justification to refuse enforcement of a subpoena. Thus courts have refused to modify investigative subpoenas unless compliance threatens to unduly disrupt or seriously hinder normal operations of a business." 455 F. Supp. at 1083-1084.

I find that the subpoena in the instant case has not been shown to be unreasonable or unduly burdensome. If there were reasons for modifying the subpoena to avoid an unjust burden on the part of the respondent, it would have been in order for the respondent to come for a protective order from the court. But it would be difficult to see how any protective order could be had segregating only government related matters when the respondent chose to combine and intermingle them with its own audit operations.

The IG has been available and continues to remain available to discuss and implement methods to reduce the inconvenience of the respondent in compliance. As the respondent has pointed out the government has auditors already on site at many locations and could work with the respondent to facilitate the review and production of the relevant internal audit reports. {F. Supp. 1182contd}

[EDITOR'S NOTE: The page numbers of this document may appear to be out of sequence; however, this pagination accurately reflects the pagination of the original published documents.]

Enforceability of Subpoena. The respondent contends that the legal requirements to establish the enforceability of an administrative subpoena have not been met. The Supreme Court has required that the investigative and subpoena by the administrative agency be for a legitimate purpose, that the inquiry be reasonably relevant to the purpose, and that the demand should not be too indefinite, too broad, or unreasonable. United States v. Powell, 379 U.S. 48, 57-58, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964); United States v. Morton Salt Co., 338 U.S. 632, 652, 94 L. Ed. 401, 70 S. Ct. 357 (1950); Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 208-209, 90 L. Ed. 614, 66 S. Ct. 494 (1946); Endicott Johnson v. Perkins, 317 U.S. 501, 509, 87 L. Ed. 424, 63 S. Ct. 339 (1943).

The cases have carefully distinguished between the limitations on a judicial subpoena and the broad latitude that must be given to an administrative subpoena. An administrative agency ". . . has a power of inquisition, if one chooses to call it that, which is not derived from the judicial function. It is more analogous to the Grand Jury, which does not depend on a case or controversy for power to get evidence but can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not". United States v. Morton Salt Co., supra, at 642-643.

It is not necessary for the agency issuing the subpoena to have "probable cause" to believe that a violation has occurred. ". . . Even if one were to regard the request for information in this case as caused by nothing more than official curiosity, nevertheless law-enforcing agencies have a legitimate right to satisfy themselves that corporate behavior is consistent with the law and the public interest". United States v. Morton Salt Co., supra, at 652.

The respondent argues that their internal audit reports have confidential and candid information relating to their non-defense contracts intermingled with DOD related data and evaluations, and that it would be detrimental to their interests to disclose any of these reports to government auditors. However, the corporation does provide these internal audit reports to their independent certified public accountants, who perform a "public responsibility" which transcends their employment relationship with the client. United States v. Arthur Young & Co., supra, at 1503. Similarly, the IG must perform his public responsibility in examining the internal audit reports and has assured the court that it will do so with due consideration with the concerns of the respondent, and with personnel that have been cleared for highly sensitive matters.

In United States v. Noall, 587 F.2d 123, 126, C.A. 2, 1978, the government on behalf of the IRS sought to examine all of the internal audit reports and related work papers of a corporation for certain periods. Although the corporation objected that the materials sought were confidential and reflected their operational plans and procedures, and that the reports might contain "hearsay rumors, [and] opinions", the Court of Appeals for the Second Circuit ordered their production. The court stated that what the internal auditors reported "might throw light" on the correctness of the corporate tax returns, and that since Congress has decided the policy issue it is not for the courts to challenge that determination. The court rejected as unpersuasive the argument that requiring production of internal audit reports runs counter to public policy because of the possible inhibition on full and frank disclosure by the internal auditors. In the instant case, I find that the public policy of preventing fraud, waste, abuse and mismanagement of public funds, so forcefully articulated by Congress, outweighs any possible "chilling effect" on the internal auditors with regard to their duties.

Congress had its reasons for defining the power of inspector generals of the various agencies created under the Act of 1978, in an effort to control, limit and restrict each inspector general within that particular department to not interfere with any other department through any of its agencies. Under the Act of 1982, the IG was given overall power within the DOD of all agencies which composed it. It would seem that the respondent would put the DCAA in the category of an independent functionary over which the IG could have no authority.

The Court of Appeals for this Circuit in N.L.R.B. v. Interstate Dress Carriers, Inc., 610 F.2d 99, 112, C.A. 3, 1979, stated that in opposing an enforcement proceeding involving an N.L.R.B.'s subpoena: "Of course, the burden on the party to whom the subpoena is addressed is not a meager one. [Citing LaSalle National Bank, supra ]. It must come forward with facts suggesting that the subpoena is intended solely to serve purposes outside the purview of the jurisdiction of the issuing agency". (citations omitted).

While the respondent presented its evidence mainly by the affidavits and documents procured in discovery, it relied heavily for its defense that the IG and DCAA arrived at the expedient of forcing the respondent to reveal its internal audit reports to the DCAA by means of the IG's subpoena power.

In deposing before the court the Deputy Inspector General Curry almost the entire substance dealt with the fact that the DCAA had made a study of 28 company locations to show that it was not entirely a popular request to companies for the compliance of divulging the internal audit reports. While it may not have been totally acceptable to the 28 company locations studied, we must remember that the DOD dealt with 200 companies and with their subcontractors. And so the study is not a fair evaluation of popularity; but popularity has nothing to do with this matter before me now.
*fn10"

What the DCAA did in previous years and how it related to various contractors was before the 1982 Amendment. What the IG has done with the subpoena power in this instance relates to the authority and the fairly mandated directions of Congress in the 1982 Amendment. So it is in the same way that the respondent argues that the DCAA had never received any of these reports for 20 years, or made complaints that the respondent had not given the reports, nor chose previously that the DCAA was entitled to its internal audit reports. This, of course, is no excuse for the respondent who no longer deals with the DCAA but with the IG. This is a new ball game in which the star player and the rules are altogether different from what they were before the 1982 Act authorized the IG to act. Therefore, this evidence has no persuasive value in furthering the belief that there was any stratagem used by the IG agreeably with the DCAA.

"The Court: Did you, of your own free will and good conscience, examine the matters, the facts, the circumstances in such a way as they related to law and your functional duty before you issued the subpoena?

The Witness: Yes, Your Honor.

The Court: If the subpoena honored or enforced, is it your intention to sublet any of your powers, and I will use the word 'sublet' intentionally. Not delegate, but sublet your rights and authority and constitutional obligations to anyone else? (sic)

The Witness: No, sir."

When asked by the court who would assist him, the answer was

"I have 570 auditors that work for me and I have a contract audit group . . . I would ask them to work with the DCAA to protect the record from that kind of violation." (Tr. page 209).

At page 210:

"The Court: In response to certain of its documents. Would you have the ability to respect, you through your agencies, and representatives, and your staff, would you have the capability of seeing that that was done in accordance with your oath of office and the duties and functions which Congress has imposed upon you?

The Witness: Yes, sir. I think that I have that capability. I deal with the most sensitive military programs in the Department of Defense and am cleared - - - I have the same clearances as the Secretary of Defense. My people are all cleared for top secret".

At page 211, when asked whether he would be concerned in good conscience to see to it that none of the rights of Westinghouse would be violated, his answer was:

"Let me assure you, Your Honor, that I consider that a solemn trust and I would take the actions that are necessary to protect those records."

The court then asked:

"And again, you say, that the action that has occurred right now, in regards to the issuance of this subpoena, was solely that of your own determination?

And the witness answered: "That's right."

"The Court: Based upon what information you had and not to serve or subserve any other purposes?

"The Witness: "No."

"The Court: How about rights not to disclose certain information to DCAA?

"The Witness: There are, if there are rights not to disclose involved with any paper, I would expect that Westinghouse would tell me that and I would certainly live up to that kind of a limitation".

Towards the end of his testimony, the witness volunteered this statement: (Tr. page 214)

"Your Honor, I would like to comment on one thing. There was an inference here that as a result of Congressional hearing that there would be pressure put on me. I want that - - I would like to have it in the record that, you know, I'm independent of the Congress and the Department of Defense in carrying out my responsibilities. I have served the Government for over 40 years and I am more than eligible for retirement. That kind of inference bothers me because that's the last thing in the world that I would let affect my decision. And if it came to that kind of an issue, I would resign and I will not take that kind of - - -".

(2) Cooperating closely with Inspectors General in other civil federal agencies to insure that there is both an exchange of ideas on methods and techniques, as well as a careful coordination of any investigation or audit which involves DOD and these other agencies.

(3) Coordinating efforts of the Departments' auditors, Inspectors General and Criminal Investigative agencies, to achieve a uniform and balanced approach to rooting out or preventing fraud, waste and abuse.

(4) Developing new ideas and approaches in improving DOD operations and reducing fraud, waste or mismanagement.

(5) Placing emphasis on use of Hotlines and mail drops to report and expose instances of fraud or abuse."

He was, in effect, even then inviting the submission to his office of matters which might require his attention. Subsequently, he also invited any member of the public to inform him of potential DOD complaints by means of a "hotline" about which he testified. The IG knew what valuable services the DCAA provided to the contract officers within the Department. He also knew that there had been lacking a follow-up on many matters, often of moment, when the DCAA presented information to the appropriate agencies. Prior to the 1982 Amendment, the DCAA was a practically isolated and independent agency in the employment of the DOD under the supervision of the Secretary. The new IG required the DCAA to be more responsible.

Because of the minimal number of his attached auditing personnel, the IG was required to perform his duties using the personnel of those agencies best and most conveniently suited for the task of effectuating the IG's inquiry within the sphere or limitation of his purpose.

In order to invalidate the IG's subpoena, the highly competent and skilled counsel for the respondent (and the Amici in their briefs) eloquently proffered the story that the DCAA had conspired with or used a willing IG to accommodate it in doing that which it, itself, was powerless to do - to issue a subpoena duces tecum to the respondent - because the DCAA had wanted to coerce the respondent into revealing its internal audit reports; and so the IG issued the subpoena for the DCAA and not for the IG's "own" purpose.

The respondent and the petitioner admittedly agree that the request by the DCAA for the IG to issue a subpoena was in violation of nothing in either the 1978 or 1982 statutes, but seemingly of a Committee comment from the 1978 Congressional Report that "The use of the subpoena power to obtain information for another agency component which does not have such power would clearly be improper". 1978 U.S. Code Cong. & Ad. Report No. 1071, at page 2709.

In so arguing, counsel was intermixing dissimilar motivations for the 1978 Act and the 1982 Amendment. Was not the Committee referring to Department agencies other than that for which each IG served? The aim evidently of Congress was to circumscribe and confine each IG within his own department and to not intermeddle with the affairs of any other department through their personnel or agencies. Thus it was expected that the 15 IGs appointed under the 1978 Act would not cross departmental lines into other departments and so they would avoid conflicts and confusion.

The purpose of the 1978 Act was to consolidate audit and investigative functions within each department under a single, responsible official. There was no IG of the DOD created under this Act, to which the Committee comment could refer. Under the 1982 Amendment, instead of consolidating each DOD auditing agency, Congress allowed each to nominally remain, but placed them under the umbrella of a powerful and independent IG. The new Congressional scheme provided for the independent integration of all DOD auditing and investigative units within the desecration of the IG. The previous Committee comment does not apply to this situation.

The DCAA is not only a DOD agency, but the Act of 1982 placed it under the supervision and control of the IG for the DOD, and so no matter how imaginative one may be to infuse a plot between the IG of the DOD and the DCAA of the DOD as separate elements, it plainly lacks fundamental logic. In order to give the respondent's postulate any plausibility, there must have been some worthy evidence of a prearrangement between the IG and some one or more responsible members of the DCAA. What the DCAA did and what the IG did shows no evidence of any improper, even fragmentary, collusion. The respondent presented no preponderance of evidentiary credibility that the "two" had entered into a scheme for compelling compliance by the respondent to produce documents for the exclusive purposes of the DCAA. The respondent called the IG for his deposition; and he appeared before me as an honorable and reliable witness. I find his unimpeached and uncontradicted testimony to be totally credible.

In addition to the primary contention by the respondent that the subpoena was issued for an improper purpose by the IG (on behalf of the DCAA and to coerce settlement of a related administrative dispute), the respondent relied on the Merck case, supra, allegations that the scope and subject of the subpoena were too broad, and the argument that compliance would be unduly burdensome.

AND NOW, TO-WIT, this 14th day of August 1985, after a Petition For Enforcement of Administrative Subpoena was filed by the United States of America, and after Westinghouse Electric Corporation, the respondent, filed its answer denying the right of the government to a subpoena duces tecum, and after the Chamber of Commerce and the Institute of Internal Auditors filed for permission to present briefs, which were allowed, and after agreed-upon discovery was had and heard and arguments made therefor and briefs submitted therewith, and after affidavits were filed and stipulations and other exhibits offered in evidence, and upon examination of all the evidence in the case as a whole, with full research of law made as it was applicable to the findings of fact made from the evidence and from the conclusions of law thereupon on the total thereof,

IT IS HEREBY ORDERED, that the respondent, Westinghouse Electric Corporation, by John B. Ferguson, Vice President and Controller, appear before a designated representative of the Inspector General, at 1000 Liberty Avenue, Room 2115, Pittsburgh, Pennsylvania, at 9:00 a.m. on the 29th day of August, 1985, or on such other date, place and time as the parties by mutual agreement must designate, and furnish the books, records, papers, and other documents specified in the said subpoena duces tecum for such auditing as the Inspector General of the Department of Defense may within his discretion deem feasible, proper and necessary to perform his duties in accordance with law.

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